Gimme Shelter

While we plan and hopefully execute our New Year’s resolutions, it might be a good time to consider and prepare for the transition of wealth — in any amount — to heirs from their parents and grandparents. This important topic is rarely discussed at any time of year.

Whether it’s the family home, a small business, a few stocks and bonds, a cabin retreat or equity in commercial real estate, children often don’t know the best way to handle assets that could be coming from mom and dad. And, if any bonus does arrive, how will the money be managed or quickly spent?

The Williams Group, a financial planning firm, researched 3,250 families that transitioned their wealth to their heirs. The firm’s data showed that only 30 percent of families transition their wealth successfully, mainly because they failed to properly prepare their heirs.

The transition of wealth hasn’t really been a problem for previous generations, but the happy-to-borrow boomers pose an entirely different challenge. Boomer parents, who comprise the GI Generation, also known as the Greatest Generation, had to “make do” during the Depression and World War II, and that philosophy still influences its conduct today.

Members of the GI Generation often are reluctant to spend money on themselves in order to make their lives more comfortable. They definitely subscribe to a pay-it-off philosophy, especially when it comes to the roof over their heads. Very few purchased — or even cared to explore — long-term care insurance and are thus footing the bill for home care assistance.

The GI’s unwritten goal was to retire without a mortgage, and not achieving this goal was often seen, and felt, as a huge and depressing failure. Many of them don’t see any reason to dive into their financial assets and “would rather leave it for the kids,” even though some kids might not need it as much as the folks.

Let’s look at spending habits. A gift is a gift. If any “wealth” is given away, it might be best to first consider the track record of the members of the group.

For example, baby boomers — the largest, healthiest and wealthiest group ever appearing on the U.S. growth landscape — never met a loan they didn’t like. After leveraging appreciation and location in their starter and move-up homes to pay for cars, college tuitions and trips, their eventual retirement home probably will hold most of the equity in their lives. Their last home will not be terribly modest because of their desire to entertain. Some members will purchase long-term care insurance in their earning years, allowing for more cash to be spent on more gadgets.

While some analysts say the boomers will gain wisdom with age and curb their spending ways down the road, others won’t be persuaded. How they will behave — even in light of the yo-yo real estate market — continues to confound researchers, but what else is new?

In an economic study prepared by The Urban Institute for AARP, authors Barbara Butrica and Cori Uccello contend that Boomers will amass more wealth in real terms at retirement than will the two previous generations. Median household wealth at age 67 will grow from $448,000 among current retirees to $600,000 among boomers. Income at retirement is consistent with trends in wealth at retirement, the study shows. Projected household income at age 67 will increase from $44,000 among current retirees to $65,000 among boomers. As with wealth, there will be income disparities among older and younger boomers. Nonretirement income is expected to decline between older and younger boomers.

However, other researchers, including Larry Cohen, director of Consumer Financial Decisions, wonder if boomers, given their spending history, will make it through traditional retirement years.

“As the cohort responsible for the explosion of credit in the 1980s and 1990s, boomers are hardly likely to forgo immediate gratification in their later years,” Cohen said.

Spend and borrow, spend and borrow … Boomers, who will work into their 70s, will continue to do both. The latest studies show equity has returned to real estate, especially single-family homes. Will borrowers who dipped into their equity before finally learn to live with a cushion or will they find a way to spend it?

Why expect them to change now?

Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.